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Shopify Focuses on Capital Heavy Fulfillment Network

Posted on Thursday, Nov 14th 2019

Ontario-based Shopify (NYSE:SHOP) has had a stellar run so far. For the year, the company’s stock has almost doubled. But the recent earnings results were a bit of a disappointment. While revenues continue to outpace market expectations, higher than anticipated spend for international expansion steered the company into a loss. Its stock fell 4% in the after-hours trading session post the result announcement.

Shopify’s Financials

Shopify’s third quarter revenues grew 45% to $390.6 million, ahead of the market’s forecast of $384 million. Non GAAP loss per share was $0.29 due to a tax provision of $48.3 million on account of capital gains in the quarter. The market had expected earnings of $0.10 per share for the quarter.

By segment, subscription revenues grew 37% to $165.6 million, ahead of the estimates of $163.9 million. Merchant solutions revenue rose 50% to $225 million compared with the Street’s forecast of $218.1 million.

Among other metrics, Shopify now has over a million merchants on its platform. Monthly Recurring Revenue climbed 34% to $50.7 million. Gross Merchandise Volume for the quarter grew 48% to $14.8 billion and Gross Payments Volume came in at $6.2 billion.

For the current quarter, Shopify expects revenues of $472-$482 million, compared with the market’s forecast of $473.21 million with an EPS of $0.27. Shopify expects to end the current year with revenues of $1.545-$1.555 billion, compared with the Street’s forecast of $1.54 billion with an EPS of $0.62.

Shopify’s Fulfillment Center Expansion

Shopify is focused on creating its own fulfillment network to help cut down costs and expand market share. It plans to invest $1 billion in this opportunity for the year. Known as the Shopify Fulfillment Network (SFN), the offering is yet to make a significant impact on financial results, but the company acknowledged that the demand for the service has been strong. Shopify currently has seven fulfillment “nodes” in the United States that are operated by third-party warehouse providers. It plans to continue growing the network through third-party warehouses as it believes that these warehouses have spare capacity in the country.

As part of this initiative, it recently announced the acquisition of Waltham-based 6 River Systems for an estimated $450 million. 6 River Systems is known for its warehouse fulfillment systems that include mobile robots. Prior to the acquisition, 6 River Systems had raised $46 million in funding from investors including Norwest Venture Partners, Menlo Ventures, iRobot Corp, and Eclipse Ventures.

Shopify wants to leverage the Fulfillment Network to compete with Amazon. But as I said before, given Amazon’s might in the area, it is a very capital intensive strategy for Shopify to follow.

Shopify’s Product Expansion

Besides the fulfillment center, Shopify is also working on expanding its product offerings and growing in international markets. To help attract more merchants, it announced the availability for merchants in most U.S. states to start selling hemp or hemp-derived cannabidiol (CBD) products on its platform. It released Shopify Chat, its first native chat function focused on improving the shopping experience for customers. Using Shopify Chat, merchants can have real-time conversations with customers visiting their stores.

As part of its international expansion initiative, the company also launched native language capabilities in Turkish. Shopify Admin is now available in 19 different languages globally. It also expanded its Payment service in Italy, bringing the total countries where its Payment services is available to 14.

Its stock is trading at $305.56 with a market capitalization of $35.4 billion. It touched a 52-week high of $409.61 in September this year. The stock was trading at a 52-week low of $117.64 in December last year.

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